Curtis, Bailey, Exelby & Sposito, P.C. - Ann Arbor, MI Accounting Firm, CPA Firm, Auditing, Compilation, Review, Washtenaw County, Ypsilanti, Michigan

CURTIS, BAILEY, EXELBY & SPOSITO, P.C.
CERTIFIED PUBLIC ACCOUNTANTS

August 17, 2001 issue

CBES firm news

2001 Tax Act

New IRA distribution rules proposed

Roth IRA or 401(k)

CBES firm news
Congratulations to our employees who recently completed requirements for their CPA certificates and are licensed to practice public accounting in the State of Michigan. In the Ypsilanti office, Carole A. Turner became a CPA on May 24, 2001 and in the Ann Arbor office, Susan C. Kowalski became a CPA on August 13, 2001. We are proud of your accomplishments.
2001 Tax Act
President Bush recently signed into law The Economic Growth And Tax Relief Reconciliation Act of 2001. Although many of its provisions would not go into effect for several years, most individuals will see at least some income tax benefits this year. These include a new 10% bracket, an across-the-board one-point cut on July 1 in each of the current tax brackets above the 15% bracket, modest relief from the alternative minimum tax (AMT), and a higher child credit. Following is a brief overview of these year 2001 tax changes.
New 10% bracket. The Act carves a new 10% bracket out of part of the current 15% bracket. Specifically, the first $6,000 of taxable income for single and married taxpayers filing separately, $10,000 for heads of household, and $12,000 for married persons filing joint returns, will be taxed at 10%. Individuals will get the benefit from the new bracket for 2001 in the form of checks in advance from the federal government of up to $300 for a single person or married individual filing separately, up to $500 for a head of household such as a single parent, and up to $600 for a married couple. Individuals who are eligible to be claimed as dependents on another taxpayer's return (such as a dependent child) and nonresident aliens would not get a check.
IRS officials expect to start cutting checks in August at a rate of about nine million a week, based on 2000 income tax returns. The Act instructs the Treasury to send the advance refund checks by October 1, but people who filed late or filed an extension may get their checks later. Those eligible individuals who didn't file a tax return for 2000 or did not owe tax will benefit from the 10% bracket when they file their 2001 tax return—they will get a credit of up to $300, $500, or $600, depending on filing status.
One-point across-the-board tax-rate cut. As the first installment of the individual income tax rate cuts that will unfold over the next five years, the “old” income tax rates of 28%, 31%, 36% and 39.6% will each be reduced by one percentage point, effective July 1 of this year, resulting in blended tax rates for all of 2001 of 27.5%, 30.5%, 35.5% and 39.1%, respectively. The 15% rate, however, will remain unchanged. The lower marginal rates should result in slightly bigger paychecks as the amount withheld for taxes is reduced.
We do not advise changing your estimated tax payments for 2001 because of this very modest reduction in rates.
Modest AMT relief. The Act provides only limited, temporary alternative minimum tax (AMT) relief for individuals. To find out if you owe AMT, start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income taxes and dependency exemptions), and subtract an exemption amount. The result is subject to an AMT tax rate of 26% or 28%. You pay the AMT only if it exceeds your regular tax bill. For 2001, the Act increases the AMT exemption amount by $4,000 for married taxpayers filing joint returns, and by $2,000 for other individuals. However, the AMT exemption amount phases out at higher levels of income, and the boosted exemption will only remain in place through 2004. Many taxpayers, particularly those residing in states with high income and/or property taxes, will not receive the full benefit of the new tax cuts and instead will have to pay the AMT unless Congress enacts additional AMT relief. Thus, it is still necessary to plan how to avoid or at least reduce the AMT.
Higher child credit. Parents of dependent children younger than 17 may claim a tax credit per child, if parental income does not exceed certain dollar limits. (A tax credit reduces your tax bill dollar for dollar, as opposed to a deduction, which reduces the amount of your income subject to taxation.) Under the 2001 Act, the maximum credit per child increases from $500 to $600 for 2001; meaning that eligible taxpayers will be able to claim the additional $100 credit on their 2001 returns filed next year. In later years the credit gradually climbs until it reaches $1,000 in 2010.
Looking down the road. Much of the $1.35 trillion tax cut in the 2001 Act will take longer to materialize. Many of the larger tax cuts in the Act do not begin until 2002 or later. Some new tax breaks phase in, while some current rules phase out over the next decade. Provisions that change your estate tax, long-range income tax, and education funding strategies, create tax-planning challenges for every level and type of tax paying individual or entity. We encourage you to review the new tax provisions that apply to your individual circumstances and we welcome the opportunity to discuss the implications of the Act on your individual tax, financial, retirement or estate planning situation. Please contact us if you have any questions or would like to set up an appointment to discuss the impact of the 2001 tax act on your financial plan.

New IRS Regulations Overhaul IRA Distribution Rules
The Internal Revenue Service (IRS) recently released sweeping, new proposed regulations that simplify the existing required minimum distribution rules for IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement plans. The new proposed regulations are being hailed in some quarters as the biggest tax change in the retirement plan arena in over a decade.
This is particularly good news for many individuals age 70 ½ and older who have IRAs. The new proposed regulations may result in an immediate reduction in taxable income for many of these IRA owners. They also provide them with more flexibility in naming and changing their IRA beneficiaries, and allow them to undo certain distribution decisions that previously were considered irrevocable.
Effective date. The proposed regulations are scheduled to take effect January 1, 2002. However, individuals have the option of taking required minimum distributions for 2001 under the new proposed regulations or the current rules. Key point: Most IRA owners will be better off under the new proposed regulations.
Highlights of the new proposed regulations. The new proposed regulations offer a number of changes from the old IRA distribution rules. Among the highlights, the new proposed regulations:

Simplify the rules for calculating “required minimum distributions” (RMDs) from IRAs (which are required when an IRA owner reaches age 70 ½) by having one uniform table that most people will use,

Reduce the amount most individuals are required to withdraw from their IRAs under the old rules (although IRA owners always have the option of withdrawing more),

Provide that the determination of IRA beneficiaries is not made until December 31 of the year following the year of the IRA owner’s death (for purposes of determining the length of the payout period),

Permit IRA owners to name or change IRA beneficiaries at any time based on who they wish to inherit the IRA assets, without having to worry about the effect on RMDs,

Allow a “fresh start” for IRA owners currently receiving RMDs by allowing them to calculate distributions based on the new proposed regulations. (Under the old rules, most distribution elections were irrevocable once the IRA owner reached age 70 ½), and

Allow assets to remain in IRAs for longer periods of time, where they can continue to grow tax deferred for the benefit of the IRA owner and, ultimately, for beneficiaries.

What to do. Whether you are an IRA owner or a beneficiary of an inherited IRA, you should discuss these new proposed regulations with your legal or tax advisor before taking a distribution for 2001. (You generally have until December 31, 2001 to take out an RMD for this year. However, individuals turning age 70 ½ this year have until April 1, 2002 to take their RMD for 2001.) You may not have to take out as much as you think.
The new proposed regulations may present many tax saving and estate planning opportunities for IRA owners and their beneficiaries. They allow many IRA owners over age 70 ½ the opportunity for immediate reductions in taxable income and to correct mistakes that were previously considered irrevocable. In addition, it may be a good time to rethink your IRA beneficiary choices. You may want to make some changes in light of the new opportunities presented by the new proposed regulations.
Also, if your IRA custodian (i.e., bank, broker, financial institution) performs RMD calculations for you, make sure to request calculations under both rules – and to use the one that best suits your needs.

From Outlook, Topics for Today's Investors, Summer 2001, UBS/PaineWebber

Roth IRA, 401(k) Plan, or Both?
Since both Roth individual retirement accounts (IRAs) and 401(k) plans offer advantages for retirement savings, you may wonder which you should utilize. Before deciding, consider the advantages of each.
The advantages of a Roth include:

While your contribution is not tax deductible, your contributions and earnings grow on a tax-free basis. You can withdraw those funds without paying any federal income taxes, as long as the distribution is qualified. A qualified distribution is one made at least five years after the first contribution and after age 59 ½.

You choose which investments to use for your IRA. Your are allowed to invest in a broad range of investment alternatives. With a 401(k) plan, you are limited to the investment options offered by your employer.

You can withdraw your contributions at any time without paying any federal income taxes or the 10% federal penalty.

You are not required to make withdrawals from a Roth IRA, even after age 70 ½. Thus, it can be a good tax-advantaged way to accumulate funds for heirs.

The advantages of a 401(k) plan include:

Contributions are typically made on a pre-tax basis, so you do not pay current income taxes on your contributions.

Your earnings grow and compound on a tax-deferred basis until you make withdrawals from the plan.

Many employers match a portion of your 401(k) contributions, effectively increasing your savings rate.

Deciding between the two. Both 401(k) plans and Roth IRAs offer significant advantages for retirement savings. Typically, the best strategy to use when making contributions is:

First, contribute enough to your 401(k) plan to take full advantage of your employer’s matching contributions. This is free money that you give up when you don’t contribute.

Next, contribute up to $2,000 to a Roth IRA, provided you are eligible to make a contribution.

Next, contribute any additional retirement money to your company’s 401(k) plan. You can contribute a maximum of $10,500 in 2001, unless your employer sets a lower limit to comply with government nondiscrimination regulations.

Finally, consider other alternatives for any other savings you would like to earmark for retirement. That could include taxable investments and annuities.

From Outlook, Topics for Today's Investors, Summer 2001, UBS/PaineWebber

Please contact us if you would like to discuss strategies to use with your retirement savings.